Can exploration stay profitable in 2019?
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The exploration industry has fought its way back to profitability, and is now keen to stay there. Explorers will continue their disciplined and cautious approach to ensure spending remains low and value from discovered barrels is maximised. Here we assess the near-term outlook for global conventional exploration, highlighting the following five themes to look for in 2019.
1. Success will remain largely a West Side story
Many explorers' attention and success will continue to be focused on the Americas. Latin American plays account for one third of global large and giant prospects to be drilled in 2019. This region will also see one third of potential play-opening wells. Exceptional reservoirs in Brazil, Guyana and Mexico will attract the most investment following significant bonuses to participate (particularly in Brazil). We expect billion-boe scale volumes from these emerging and newly-proven plays, as has been the case in the last couple of years.
On the other side of the Atlantic, Southern and Eastern Africa will take second place in terms of drilling. On the eastern side of the globe, the drivers are more often above-ground.
Many 2019-planned wells have the potential to open new plays or add large volumes. Worldwide, we expect 2019 discoveries to add some 15-20 billion boe of new resource. For more information on different regions and their potential, purchase the full insight.
2. Big exploration stays an exclusive club
The recent uptick in exploration economics over the last two years shows an industry shaping up to be slimmer. Fewer companies are drilling fewer wells. In all regions, companies ranging from large to small independents decided to minimize or stop exploring. Only those with suitable capabilities and exploration risk tolerance continue. Even as average exploration returns rise to double-digits, newcomers will be few and far between. If anything, the current corporate landscape will continue to narrow.
Exploration remains critical, indeed irreplaceable, for the Majors and all eyes will continue to follow their wells. A small number of independent IOCs will also be readying their high-impact prospects. Less active in exploration in the coming year will be the private equity (PE) backed explorers.
3. Budgets remain flat while activity edges up
Companies that are sticking with exploration have renewed confidence. A stronger oil price, lower cost base, greater drilling success in 2017-2018, and a healthy inventory of new quality acreage have cheered up the industry. However, this more upbeat spirit has been hard gained and companies will be loath to give it away. Purse strings are not about to burst open. We expect budget control and decision making to remain rigorous and companies to stay ruthlessly disciplined in selecting only their best prospects.
Global exploration and appraisal spending in 2019 will stay close to its current level – slightly below US$40 billion per year.
4. Exploration profitability continues
Exploration returned to profitability in 2017, with full-cycle returns well over 10%, whilst adding over 17 billion boe. This trend has continued into 2018, with over 10 billion boe discovered so far and doubtless more results and disclosures to come. Are these anomalies? We don't think so. The achievements of the last two years were won via uncomfortable but much-needed step changes. These included budget cuts, deploying more efficient rigs at lower rates, refocusing portfolios, avoiding technical complexity, avoiding tough fiscal environments, and reloading acreage at low-cost. These are structural corrections that will help the industry stay on track and continue to be profitable.
5. Growing trend of public and government opposition to exploration
Some governments reacted to the price downturn with explorer-friendly adjustments to fiscal and regulatory regimes. But not all changes in recent years have been so supportive for the industry. A new trend is emerging, with some governments opting to accelerate a non-carbon future by banning exploration. Sustainable energy technologies are advancing and public attitudes towards oil and gas exploration are changing, too. As a result, we foresee more partial or complete exploration bans. This is a trend for economies that can afford a declining hydrocarbon contribution in their energy mix. The concern for the industry will be if such bans spread to countries with greater subsurface potential.